Q4 2022 WesBanco Inc Earnings Call
Speaker 2: The.
Speaker 3: Good day and welcome to the West Banco fourth quarter 2022 earnings conference call.
Speaker 4: All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker 5: After today's presentation, there will be an opportunity to ask questions.
Speaker 6: To ask a question, you may press star and one on a touch tone phone.
Speaker 7: To withdraw your question, please press star then 2.
Speaker 8: Please note, this event is being recorded.
Speaker 9: I would now like to turn the conference over to John Ione, Senior Vice President of Investor Relations. Please go ahead.
Speaker 10: Thank you. Thank you. Thank you. Good morning and welcome to West Banco Inc.'s fourth quarter 2022 earnings conference call.
Speaker 11: Leading the call today are Todd Colossen, President and Chief Executive Officer, Jeff Jackson, Senior Executive Vice President and Chief Operating Officer, and Dan Weiss, Executive Vice President and Chief Financial Officer.
Speaker 12: Today's call, an archive of which will be available on our website for one year, contains forward-looking information.
Speaker 13: Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings related materials issued yesterday afternoon.
Speaker 14: as well as our other SEC filings and investor materials.
Speaker 15: These materials are available on the investor relations text server website with banka.com.
Speaker 16: All statements speak only as of January 25th, 2023, and West Bank will undertake some obligations to update them.
Speaker 17: I would now like to turn the call over to Todd. Todd?
Speaker 18: Thank you, John . Good morning, everyone.
Speaker 19: On today's call, we'll review our results for the fourth quarter of 2022 and provide an update on our operations and current 2023 outlook.
Speaker 20: Key takeaways from the call today are.
Speaker 21: Our operational strategies and core advantages were evident throughout 2022 and were highlighted by our earning numerous national accolades.
Speaker 22: We had solid financial performance demonstrated by loan growth, that interest margin expansion, and discretionary cost control.
Speaker 23: We remain well positioned for continued success and are excited about our future growth opportunities.
Speaker 24: The West Banco had another successful year during 2022 as we remained focused on ensuring a strong organization for our shareholders and continued to appropriately return capital to them through both long-term, sustainable earnings growth and effective capital management.
Speaker 25: Through successful operational execution, we generated solid annual net income while remaining a well-capitalized financial institution with strong liquidity, balance sheet, and credit quality metrics built upon our well-defined strategies and core advantages of the financial utilities industry.
Speaker 26: which will ensure success regardless of the economic environment.
Speaker 27: We are pleased with our performance during the fourth quarter of 2022 as we continued to deliver loan growth, controlled discretionary expenses, and maintained our reputation for credit quality.
Speaker 28: For the quarter ending December 31, 2022, we reported net income available to common shareholderswho paid and spent their lives.
Speaker 29: of $49.7 million in diluted earnings per share of 84 cents when excluding after-tax merger and restructuring charges.
Speaker 30: On the same basis for the full year, we reported net income available to common shareholders of $183.3 million and diluted earnings per share of $3.04.
Speaker 31: Furthermore, the strength of our financial performance this past quarter is further demonstrated by a return on average assets of 1.18% and return on tangible equity of 16.05%. And our capital position remains strong and continues to provide financial and operational flexibility.
Speaker 32: Throughout the year, we accomplished several milestones and continued to receive numerous national accolades that resulted from our performance, operational strengths, and community focus.
I'd be remiss if I did not congratulate our employees for these recognitions as they are a testament to their hard work and dedication.
just to highlight a few.
West Banco remains a leader in and advocate for its communities, and we continually look for ways to expand our outreach and involvement, including the issuance of our initial sustainability report.
We launched new loan production offices in Cleveland, Indianapolis, and Nashville, complementing our existing LPOs in Akron-Canton and Northern Virginia.
Based on customer satisfaction and consumer feedback, West Banco Bank was named by Forbes as the number one bank in Ohio.
and the number two bank in Kentucky.
including high scores for trust, branch services, terms and conditions, customer service, digital services, and financial advice.
For the fourth year in a row, we were named one of the World's Best Banks, which was also based on customer satisfaction and consumer feedback.
For the third year in a row in the top 12, West Banco Bank was once again named to Forbes' list of the best banks in America based upon growth, credit quality, and profitability.
We were named to the Forbes list of America's best mid-sized employers, earning a spot within the top 10% of all companies recognized, as well as securing the number two spot out of 30 companies included in the banking and financial services category.
In fact, we were the only mid-sized bank making the top 10 for both financial performance and employer of choice. Finally, West Bank was recognized as one of America's most trustworthy companies, as well as being one of only 20 banks to earn this nationwide honor for three touch points of trust.
mid-sized bank making the top 10 for both financial performance and employer of choice. Finally, West Bank was recognized as one of America's most trustworthy companies, as well as being one of only 20 banks to earn this nationwide honor for three touch points of trust. Customer trust.
Investor Trust, and Employee Trust. The key story this quarter was the strength of our lending teams as we demonstrated strong loan growth for the third consecutive quarter, combined with solid credit quality measures, which continue to remain relatively low from a historical perspective.
and consistent through at least the last 10 plus quarters. Reflecting the strength of our markets and lending teams, we again reported solid broad-based loan growth during the quarter.
Total loan growth, excluding SBA PPP loans, was 11.7 percent year-over-year and 4.2 percent, or 16.8 percent annualized when compared to September 30, 2022. While key credit quality measures, such as total loans past due, include the
and criticized and classified loans decline both year-over-year and sequentially to 0.19% and 2.34% respectfully of total loans.
Despite mortgage originations of just $179 million during the fourth quarter, 90% of which were either purchase or construction.
Residential real estate loans increased more than 20% both year-over-year and sequentially annualized through the retention of approximately 80% of the one to four family residential mortgages generated by our team of mortgage loan originators.
Total commercial loan growth continues to benefit from our teams and markets that have been enhanced by our hiring efforts over the past two years.
For the fourth quarter, total commercial loan growth was 9.6% year-over-year and 4.1% from the third quarter, or 16.2% annualized.
Our commercial teams continue to find new business opportunities to replenish the pipeline.
In addition to new loan originations of approximately $490 million during the fourth quarter, our commercial pipeline has remained relatively consistent since last quarter at approximately $900 million.
The strength of our pipeline represents the talent of our lending teams as well as early success from our Loan Production Office strategy, which only account for approximately 13% of the pipeline.
While we will see what the economy will provide this year, I am encouraged about our future commercial lending prospects as our newer lenders continue to gain traction, our recent LPOs gain market share, and we hire additional lenders.
Through the last few years, we have transformed our company into an evolving regional financial services institution with a community bank at its core.
We have done this through the successful expansion at a higher growth market spanning six states, with the majority of our company now located within these markets, while adhering to our foundation of disciplined discretionary cost control, risk management, and credit standards.
As we have discussed before, a key investment in support of this evolution has been and will continue to be the investment in our employees as they are critical to our long-term growth and success.
During both 2021 and 2022, we focused on improving retention and boosting morale by implementing increases in the hourly wage, which was very well received.
In addition, we developed plans to increase the depth and strength of our teams across our business lines and markets.
We successfully executed upon these plans by hiring more than 45 revenue producers during 2021 and more than 50 during 2022, and have begun to see the growth and positive operating leverage from these investments.
We will continue to enhance our evolution into a solid and sound growth story combined with our strong foundation and core advantages through an ongoing lender hiring strategy.
While we will continue to evaluate existing lenders to ensure appropriate productivity, we plan to annually add high value and productive individuals to enhance our ability to leverage growth opportunities across our markets.
We remain focused on ensuring an organization with sound credit quality, solid liquidity, and a strong balance sheet.
We have the right markets, teams, leadership, and strategies to provide long-term success for our shareholders, customers, and employees.
We're excited about our opportunities for the upcoming year.
I would now like to turn the call over to Dan Weiss, our CFO , for an update on our fourth quarter financial results and current outlook for 2023. Dan? Thanks, Todd, and good morning. During the quarter, we recognized strong loan growth, continued stability in our credit quality measures, improvement in our net interest margin, and maintained discipline over expenses.
As noted in yesterday's earnings release, during the fourth quarter we reported improved GAAP net income available to common shareholders of $49.7 million in earnings per diluted share of $0.84 and net income of $182 million in earnings per share of $3.02 for the full year.
Excluding restructuring and merger-related charges, results for the 3 and 12 months ending December 31, 2022 were $0.84 and $3.04 per share respectively, as compared to $0.82 and $3.62 last year respectively.
It's important to note that the 2021 was favorably impacted by a negative provision of 51.6 million net attacks, or 79 cents per share, as compared to a benefit of 2 cents per share during 2022.
Total assets of $16.9 billion as of December 31, 2022 included total portfolio loans of $10.7 billion and total securities of $3.8 billion.
Loan balances for the fourth quarter of 2022, which grew both year over year and sequentially, reflected strong performance by our commercial and consumer lending teams and more one-to-four family residential mortgages retained on the balance sheet. Furthermore, as we expected, the
Commercial real estate payoffs moderated this quarter, totaling approximately $63 million.
We also reclassified $86 million of consumer loans secured by residential real estate to the HELOC category to better reflect the underlying collateral.
SBA PPP loans in the prior year period totaled approximately $163 million as compared to $8 million this period. Importantly, reflecting the strength of our underwriting standards, our key credit quality measures continue to remain at relatively low levels and favorable to peer averages. Thus deposit levels remain a key story.
bearing deposits improved to 36% of total deposits.
Total deposits at year end were $13.1 billion, down 3.2% year-over-year due to a $407 million reduction in CDs.
The net interest margin in the fourth quarter of 3.49% increased 16 basis points sequentially and 52 basis points year over year. This increase reflects our successful deployment of excess cash into higher yielding loans combined with 425 basis point increase in the federal funds rate throughout the year.
Our core margin continued to increase quarter over quarter from 3.27% to 3.44%, which excludes purchase accounting accretion of five basis points for both periods, while SBA PPP loan accretion was a basis point or less for both periods.
A robust legacy deposit base provides a pricing advantage as compared to peers, especially those primarily in major metro markets. We are not immune to the impact of rising rates on our funding sources.
Deposit funding costs for the fourth quarter of 2022 increased 44 basis points year-over-year to 57 basis points or 29 basis points when including non-interest bearing deposits.
This reflects a total deposit beta of 8% as compared to 375 basis point increase in the federal funds rate throughout the year, excluding December , which did not meaningfully impact the year-to-date average. For more information, visit www.fema.gov
For the fourth quarter of 2022, non-interest income of $27.8 million
was down $2.9 million year over year, primarily due to lower mortgage banking income, which decreased $2.3 million due to a reduction in residential mortgage originations consistent with the industry in general and the retention of more loans on our balance sheet.
Security's brokerage continued its organic growth trend as net revenues increased $1 million year over year to a record $2.6 million.
Our commitment to discretionary expense control in an inflationary environment combined with loan growth and net interest margin expansion resulted in an improved efficiency ratio of 56.9%, excluding restructuring and merger-related expenses.
Non-interest expense for the three months ended December 31, 2022, totaled $90.4 million, a 2.6% increase year over year, and a 1.6% decrease sequentially.
It's important to note that the fourth quarter included a couple of large credits totaling approximately $2.5 million, which are not expected to repeat in our expense run rate going forward. Within salaries and wages, there was a $1.8 million downward adjustment to bonus expense mostly related to lower mortgage lending commissions and annual volume-based incentives.
And with employee benefits, there was a $600,000 credit related to the deferred compensation plan which fluctuates based on movement in underlying equity securities.
Adding these two items back, non-interest expenses for the fourth quarter would have been approximately $93 million.
Turning to capital, during the fourth quarter, the quarterly dividend was increased from $0.34 to $0.35 per share, representing a 2.9% increase.
Our capital position remains solid, as demonstrated by regulatory ratios that are above the applicable well-capitalized standards, and our tangible common equity ratio improved to 7.28% as of December 31, 2022. Now I'll provide some initial thoughts on our current outlook for 2023.
We remain an asset sensitive bank and currently model fed funds to peak at 5% during the first quarter and then hold steady throughout the remaining quarters of 2023. We are modeling a couple basis points of margin expansion in the first quarter and hold relatively flat for the remainder of the year as deposit pricing continues to rise.
We expect purchase accounting accretion to be approximately 4 to 5 basis points per quarter and no meaningful SBA PPP accretion.
As I mentioned, our robust legacy deposit base provides a pricing advantage over the industry and we anticipate our deposit betas to continue to be lower than peers and to generally lag the industry.
Residential mortgage originations should remain positive relative to industry trends due to our new loan production offices and hiring initiatives, as well as the anticipated stabilization in interest rates and should begin to rebound as the year progresses.
While it is dependent on origination production, we continue to expect to move over time to selling approximately 50% into the secondary market, subject to customer preferences and pricing.
Trust fees will continue to benefit slightly from organic growth, as well as be impacted by the trends in the equity and fixed income markets.
As a reminder, first quarter trust fees are seasonally higher due to tax preparation.
Security's brokerage revenue should continue to benefit modestly from year-over-year organic growth.
Electronic banking fees and service charges on deposit will most likely remain in a similar range at the last few quarters as they are subject to overall consumer spending behaviors.
In addition, we anticipate an increase in new commercial swap fee income above the approximate $4 million we've earned annually over the last few years as we have implemented improvements in our training and strategy. While we remain diligent on discretionary costs to help mitigate inflationary pressures, we intend to continue to make important investments in our training and strategy.
growth-oriented investments in support of long-term sustainable revenue growth and shareholder return. This will include ongoing efforts to attract and retain employees, in particular commercial lenders across our metro markets as we continue a similar hiring strategy that we implemented for 2022.
We'll continue to make improvements to infrastructure, which will include upgrading about a third of our ATM fleet with the latest technology as well as other digital product enhancements.
We anticipate higher pension expense of approximately $1 million per quarter within employee benefits based on an expected lower return on plant assets and expect to be impacted by the industry-wide FDIC insurance rate increase.
To support our growth plans across our markets, we anticipate investing more in marketing with a focus on revenue generating campaigns.
We will also continue to evaluate our financial center network to identify cost-saving opportunities which could provide a benefit in the second half of the year.
Based on what we know today, we believe our quarterly expense run rate to be in the mid $90 million range. We believe that these investments are appropriate in support of long-term sustainable revenue growth and associated shareholder return and will continue to drive positive operating leverage. We believe that these investments are appropriate in support of long-term sustainable revenue growth and associated shareholder return and will continue to drive positive operating
The provision for credit losses under CECL will be dependent upon changes to the macroeconomic forecast and qualitative factors, as well as various credit quality metrics, including potential charge-offs, criticizing classified loan balances, delinquencies, changes in prepayment speeds and future loan growth.
Lastly, we currently anticipate our full year effective tax rate to be between 19 and 20%, subject to changes in tax legislation, deductions and credits, and taxable income levels.
Operator, we are now ready to take questions. Would you please review the instructions?
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The first question today comes from Daniel Tamayo with Raymond Jean. Please go ahead. Even 58% of the people queued up would rather reg better pay up they're 1100 Kut
Good morning guys.
Maybe we start on the loan growth expectations. It's just interested in what you're seeing and what you're expecting for the coming year and then with the loan deposit ratio still relatively low, how much you're willing to let that rise.
and fund from securities runoff.
Yeah, okay, I'm glad to answer that Dan. It's obviously loan growth is going to be economy dependent, right? So a lot of mixed signals out there right now with regard to what the economy is going to do. I think we get the GDP number this Thursday, but you know, I think in looking at kind of our comments in the past have been
upper single digit growth rate kind of on a long-term basis is kind of what we've been striving towards and kind of feel like That's where we were last year nearly in the upper upper single digit low double digit range and That's really what we're comfortable with. I think on a longer term basis Yeah pipelines, you know continue to stay consistent as I said in my comments
I just don't know what the economy is going to bring us right now. When I look at the deposit side of things, and Dan might want to jump in here as well too, and along the deposit ratio, you know, it is an advantage that we have right now. You know, we don't want to give that all away, obviously. But we do expect to continue to have some solid long growth over time.
And the deposit base is going to need to build along with that. So it wouldn't be the plan to let that run too far. But at the same time, we ought to take advantage of that deposit funding advantage that we have. We'll probably get into more deposit discussions in a little bit here, I would imagine.
When we really look at deposits in general, obviously the CDs, we let those run off.
We replaced those with some federal home loan bank borrowings, but we are reintroducing some CD specials. Nothing like you would see at some of our competitors in the higher growth markets. We think we can generate some CD business or at least slow the runoff of CDs in our legacy markets by just being a little more aggressive than we've been.
But I would think that loan to deposit ratio may drift up a little bit more, but we really don't want to give that all away. We're comfortable in that 90 to 95 percent loan to deposit ratio over time. And when we were there a few years before the pandemic, I imagine we'll get back to that point. So.
how quickly we get there will be dependent upon how aggressive we need to be on deposits and really be driven by what kind of loan growth that we see. That's a long-winded answer, but that's kind of the best way I see it right now anyway.
No, that's terrific. I appreciate all the color. And maybe my follow-up just on credit quality, you've seen the reserve ratio come down here, a decent amount over the last few quarters, settling around $110. I think I just
you know, just curious, you know, what the big drivers are there and then what would we need to see to have reserves grow from here outside of an increase in...
and lost content within the portfolio. Yeah. Related to CECL, Dan, do you want to jump in and cover that comment? Yeah, I would say if you look in slide nine, you can see there's a water poltergeist there that kind of shows.
You know, the reserve bill in dollars, obviously we saw a $3.1 million provision this quarter. That's actually the first time in, I think, seven quarters that we've recorded a debit to the provision. You know, the last seven quarters have been negative.
And so I think what we've seen kind of since the pandemic, we've seen a number of qualitative factors related to some of those higher risk areas kind of continue to roll off over the last seven quarters. And we're to the point where I think those are more or less behind us.
said the drivers of the reserve and the provisioning going forward really are going to continue to be more normalized.
future macroeconomic forecast, loan growth, and then of course, to the extent that we would see any charge off, that would also impact provisioning and reserve levels. But I think those are the drivers probably going forward, and I would say that that 3.1 million that we recognized here in the fourth quarter.
Please go ahead.
Hey, good morning, and thanks for taking my questions.
Good morning. Good morning.
I guess I wanted to start here on funding cost. And you mentioned in the prepared about not being immune to higher interest rates. Can you expand on that a little bit and maybe where are you starting to see signs of pressure? And do you think that can ease as the Fed slows? Or do you think there is some expectation of kind of lagging pressure as we move through 2023?
Yeah that's a great that's really great question particularly you know when you know when will when will the Fed start to drop rates right I mean our forecast as Dan mentioned is to go to 5% in the first quarter and stay there throughout the year so that's kind of what we're anticipating right now. If rates do start to drop toward the end of the year or into 2020.
really is throughout all different rate cycles. So we would be in a position I think to be able to you know bring deposit costs down if the the Fed starts starts dropping rates at some point in the in the future. I guess the question here now is we you know we're not immune to deposit costs increase but because of
our strong core funding base that allows us to lag. And we've had that historically that benefit and we're seeing it again now. Obviously rates moved up a lot faster, a lot quicker than anybody in the industry really has seen before. So relying on betas from
years ago really may not be very applicable to now. So we're watching it pretty much on a weekly, if not daily basis, what's going on with deposit costs. We've been proactive with some of our higher tier savings rates, you know some new CD specials, giving some pricing authorities in our markets and things like that. So we are addressing that.
But how quickly we need to address that, how much we need to address that, you know, will really be dependent upon what we need for loan growth, but also what we see happening in the economy here over the next month or two. And I still don't think that you'll see us on the lower side from a VEDA perspective of peers. We expect that advantage to continue right through the rate cycle that we're in right now.
Okay, that's helpful. And then I wanted to pivot here to talk about loan growth a little bit too. I get that you're reluctant to provide a full year view of kind of the economy and what that might mean for loan growth. But could you help us understand the quarter a little bit better of the trends?
for 4Q, is that new offices and execution, or do you think it's also strong loan demand, or is it more moderating payoffs? Just help us break out those pieces a little bit so we can think about where to go from here.
in execution? Or do you think it's also strong loan demand? Or is it more moderating payoffs? You know, just help us break out those pieces a little bit so we can think about where to go from here. Sure, sure.
Well, about 13% of our pipeline is from the LPOs, right? So, you know, they're showing up in the pipeline, but we're not seeing, you know, really long growth in any material way at this point from the LPOs. We should see that, I think, this year, next year, again, economy dependent. So that is something that's going to be a benefit to us, but I would not tell you that the long growth...
acquiring into higher growth markets like Louisville, Lexington, the mid-Atlantic markets to put a little more of a growth profile on West Bank while still keeping our core advantages on the credit and deposit side and everything else. I think this is just the fulfillment of that, at least that's the way I look at it, was we had to acquire into those markets.
and then assimilate those organizations and then hire additional people into those organizations. And now we're seeing the benefit of that starting to show up, which is why I'm really looking at the upper single digit, you know, long growth going forward is because we've been building this for quite a long time now and I think our organization...
is positioned well to take advantage of that. With regard to the fourth quarter, we did get some benefit from a lower level of commercial real estate payoffs of about $60 million and we had $160 million I think in the quarter before that so we expect about $80 to $90 million to kind of be our normal.
quarterly commercial real estate pay off rate. So we did get a benefit from that and as Dan said in his comments we are putting 80% of our RESI mortgage on our books as well too. We typically would do about 50%. So, you know, I think if you were just to roll the RESI mortgage back to 50% and look at that assuming we had done that last year.
we would have had a loan growth of about 8 or 9 percent. Because we put more resi on, that bumped us up to a little over 11 percent. But that's market dependent based upon what's going on with what consumers want. But that's why I really feel like we're more at an upper single digit loan growth rate, which I think is sustainable.
over time any quarter can be up or down. You know a couple hundred million dollars is going to move the needle a lot with a bank our size and you really need to look at it I believe on an annual basis or you know two to three year basis to really get a good idea of you know what what the franchise run rate is.
Great, thanks for all the help. Thank you.
The next question comes from Casey Whitman with Piper Sandler. Please go ahead. Ok, go ahead.
Hey, good morning.
Hi, Casey. Welcome back.
Thank you.
Good morning.
I guess just moving on to thinking about capital here. First, can you touch on your appetite for buybacks going forward, and how price sensitive you are there? And then the follow-up would be just give us an update on how you're viewing M&A for you guys this year.
I'll start off on the capital side and let Dan jump in on that and then I'll hit on M&A as well too. But I think from a capital perspective, we were watching what was going on in the last couple of quarters with AOCI. Some say it matters, some say it doesn't, but we were paying a lot of attention to it.
And we did we did slow back the buybacks, you know, the five acts we did do in the fourth quarter We're at the early part of the fourth quarter and part of that was because you know We wanted to watch and see what happened with with AOCI and trying to stay in our you know, seven percentage type of range
But also the price to tangible book was up close to 200% or so. And we felt that was a pretty big number. I think as we look at this year, some of the things that we'll get, I think AOCI has moderated, we don't see that, we don't know that, I'm not sure that's gonna be as big of an impact.
people's planning this year as maybe it was last year. But you know when I really look at the whole buyback piece of it that's something we're going to have to evaluate. I mean I know a lot of people are looking through AOCI so if you look through AOCI you know maybe you're not at 190 or 200 percent of tangible book maybe you're at a lower number. So that's something that we'll evaluate. We haven't made up any.
firm decisions yet, but you know we still have 1.2 million share authorization and we'll pull on that when we think it's appropriate. That could be this year, we may start doing some of that, but I think that's going to be dependent upon what we see over the next couple of months.
Dan, anything else you would add on that? No, I think you covered it well. Okay, sorry, I took all your comments on that. On the M&A side, I would tell you that we're not actively looking at anything right now. We're doing a lot of introductions. Jeff is sitting next to me here and he and I are making a lot of trips.
the markets that we have a lot of interest in and introducing him to to some key executives at some other banks people that I've known and he's introduced him actually to some people he's known as Well, too, so we're definitely interested if the right thing were to come along. We think we've got the capital
liquidity, obviously got a new core operating system we put in place a year and a half ago now. So we feel like we would be ready to do something, but we don't feel like we need to. I think with finally being able to realize the loan growth that we've been working towards for a long time, it's kind of nice to.
to be in that position and just focus on organic growth. So we may very well just decide to do that. But also at the same time if we had the right opportunity come along I think we'd be prepared to act on it but at this point we're not actively looking at anything.
Understood. Are there other particular markets that you would be most interested in or is it sort of footprint wide? Yes, there are a lot of people in Starbucks that ice-c islands want to master you like
Yeah, I think it's the markets that we're already in and where we have LPOs, right? So part of our idea with the LPOs is to get to know some of the markets a little bit better and then do a follow-on acquisition potentially. We did that in Pittsburgh, set up LPOs about 15-18 years ago and then ended up buying two banks eventually up in that marketplace once we got to know it.
at. So finding something that would be in those growth year markets, try to continue the story that we've been working on which is to have us be a little higher growth profile company while still maintaining good, you know, good obviously good credit quality. We couldn't be opposed to doing something that was in market already.
If there was decent expense takeouts, branch overlap, that kind of stuff, I think that would be interesting to look at if something like that came along. But the focus really is on higher growth markets, Pittsburgh, Columbus, Cincinnati, Louisville, Lexington, the suburban DC market.
throw Northern Virginia, throw Central Tennessee, throw Central Indiana in the mix as well too. Those are all the areas that would be of interest to us.
Great. I appreciate it. Thanks. Thank you.
As a reminder, if you have a question, please press star and 1 to enter the question queue.
The next question comes from Kathryn Mueller with KBW. Please go ahead.
Thanks, good morning. Hi Catherine.
I wanted to go back to the margin and funding conversation. And I know you mentioned, Todd, that you added a little bit of borrowing this quarter, but you continue to see CD balances decline, so it kind of shows FHLB over CDs. But do you think as we move into 2023 that changes, and so if we look at the balance of FHLB at quarter end, we're going to see a lot of changes in the FHLB.
Should we model that to decline a little bit into the year, maybe grow CDs? Just kind of curious how you're thinking about the kind of higher cost, more wholesalish funding strategy to fund growth. Thanks. Sure. Why don't I hand that off to Dan. For the whole panel today, I'm Scott
Yes, I would say, Kathryn, a couple things. Obviously, the securities portfolio right now represents about 22% of our balance sheet. That's a little heavier than where we've maintained it historically. So, we do expect to get some funding from the company.
that securities portfolio and reinvest into loans. So right now that's kicking off about $50 million per month, $150 million per quarter. And so that would be where the first dollar would come from. If we look towards CDs relative to FHLB Boring, the FHLB has said, well are not see this size at all or maybe it's your own bank account and just control money? Well, we're using the short term for financing to make sure that any
As Todd mentioned, we do have some CD-grade specials, so we expect that that more or less will slow down some of that CD runoff, but I would say to the extent that we see... If we didn't see deposit growth, let's say...
and loan growth for more than kind of that $150 million per quarter, kicking out of the CD portfolio. I think we would continue then in that case to leverage those wholesale borrowings. Of course we have some other levers that we can pull.
But I think today we would be, to the extent that we needed more than let's say that 159 per quarter, plus the slowdown in CDs, we would continue to leverage those wholesale parts.
Okay, great. And I think you mentioned in your prepared remarks about, I think you said that the margin you expect to be flat for the rest of the year. Can you just circle back on your expectations for the margin this year? And I feel like everyone
is thinking about this quarter's margin as the peak. But I think you could argue that you might be different than your peers, just given your ability to lack funding costs.
So just kind of curious how you're thinking about peeking in in the outlook.
Yeah, so the way we think about that really, and as I mentioned, a couple basis points of expansion here over the next...
three months or so...................
Certainly, we're not expecting that double digit expansion that we saw here in the fourth quarter 16 basis points or anything like that.
I think it will be very much dependent on deposit inflows and outflows. Again, going back to that wholesale borrowing discussion, it will be dependent on what loan growth looks like and how much we can fund through deposits and CD retention versus FHLB borrowings. Thanks.
dependent on deposit inflows and outflows. Again, going back to that whole-cell boring discussion, it would be dependent on what loan growth looks like and how much we can fund through deposits and CD retention versus FHLB borings.
But generally speaking, we do expect...
For example, loans to continue to reprice upward in the second quarter off of those first quarter rate hikes. So we've got in our model 50 basis points of Fed fund increase in the first quarter. But we really expect the funding costs to rise as well such that they more or less will kind of offset.
net to zero. And so that's where we look at kind of a stable NIM kind of in the second quarter going forward. Again that's assuming you know a 5% fed funds rate that holds stable as well throughout the year. But then once you get past second quarter.
I think we've got a lot of momentum. We're going to begin to reprice fixed rate loans that are maturing. We'll still have the variable rate loans that have repricing terms that will be on in just the three months. That will be repricing as well. And I think those tailwinds will really begin to...
kind of offset the rising deposit cost from a margin, NII is the end point. So that's kind of how we look at the margin, basically from second quarter forward, kind of a stabilizing, taking advantage of the pricing or the increase on the asset side.
with basically an offset on the deposit or the funding cost side. Obviously the expenditure or the strategy is to get to probably mid-90s, who knows when that will happen down the road, obviously a ways. But we're going to be very tactical about how we do that. And that's going to be based upon things that are going to reveal themselves to us in the industry.
over the next couple months, the next couple of quarters. But the plan wouldn't be to keep deposit rates so low that we use up all that extra balance sheet capacity too quickly. At the same time, we want to make sure that we capitalize on the advantage that we have as well too.
And make sure that we.
we are raising rates appropriately, not too fast, not too slow, kind of slowly let the line out, so to speak, until we start to creep up into the upper 80s and then lower 90s and then eventually mid-90s. That may take a few years to materialize. Again, that's going to be dependent in large part, I think, on what we see on the long growth side.
And last question on the margin, how about loan, we're a loan yield.
maybe towards the end of the quarter, and new pricing as well.
Yeah, so we do have one slide for, or show kind of the new loans that are coming onto the books coming out right around six and a quarter percent. And, you know, if you looked at kind of......
A spot yield, you know, for the month of December, we'll call it. Those were coming in around 6.79. So, that's about a 55 basis point increase, you know, in the month of December versus, you know, the quarter. So, that's kind of where we're at.
Great, and that's new loans coming on, not the total portfolio, of course.
cock? notecard
Great. Okay. Great. Very helpful. Thank you so much. Thank you.
The next question comes from Manuel Navas with DA Davidson. Please go ahead. Yes and no.
Hey, good morning. Could you add any color on what you're thinking? I know it's early stages for kind of...
Rethinking the branch network in the back half of the year. Is that more to kind of fund investment? Does it drop to the bottom line, modernizing the network? Just kind of expanding on any early thoughts and early goals there. Obviously, it's not set in stone yet.
Sure. We've last a couple of years, a number of years actually, we've been...
rationalizing the branch network or optimizing it. We build a branch here or there every once in a while, but we've been optimizing 10 to 15 branches or so a year and using those excess, I guess I would say, reduction in expenses.
to fund all the above. So some of the technology spends, Dan mentioned the ATM network we're upgrading. So some of the money is going towards that. Also the new landers that we've hired and then we anticipate hiring the LPO's. So we've been able to redeploy those savings into those areas and really drive.
I think a significant amount of current and future positive operating leverage from those investments. We're going to continue to do that looking at the whole branch distribution system. Obviously we've got a big advantage in our legacy markets. I don't want to give that up. Those branches in some of our rural markets are important to us.
Customers are important to us; the deposits are important to us, but at the same time, we want to make sure that we're balancing out the right way so that we get invested. We need to invest and still keep the efficiency ratio, you know, where we want it to be and to keep, as Deanne mentioned, the kind of the quarterly run rate inexpensively, you know.
For the next couple of quarters, in the mid-90 range. So, that's kind of the balance that we're doing. We don't know how much longer we would continue to do 10 to 15 branches a year, but again, that's somewhat dependent on M&A as well, and, you know, buying other banks that have a branch network that could be rationalized too.
That's helpful. So, it's kind of already in the run rate, that type of savings and investment at the same time.
Is that the best, or I'd wait to think about it? Yes.
Okay.
If the economy slows down a bit and you have a little bit slower than high single digits, kind of near term, long growth, would that impact kind of your hiring plans or any of these somewhat like expensive initiatives?
Well, I would say if we see deposit costs increase quicker than we're anticipating, then I think we've got some expense things that we've talked about that we could do to try to stone.
come through with the same net income we'd like to come through with. So, we have been kicking around some ideas on the expense side that are not baked into the run rate. I'm not really ready to talk about them. They're not people-related. But, you know, there are some things that we could do if the economy slowed, if we entered a more severe recession than everybody thinks we might, or...
I think if long-term growth slows down, the plan would not be to abandon our strategy to build capacity for long-term growth. We've been doing that for a while, really building that for a while. That's something that's important to Jeff as well as he succeeds me, too, is that we have that put in place.
So the context that he has, the context that I have, and the work that we've done over time with regard to the markets and lenders, I don't think we want to slow that down. We'd like to continue to move it forward, but we don't want to show a big expense number in any one quarter or two.
We want to make sure that we're getting the positive operating leverage from the teams that we're hiring, the people that we're hiring, and things like that. So that's kind of the way I guess I would answer it at this point is that our strategy to get that upper single-digit loan growth, really don't want to abandon it. You know, obviously if you hit a real severe recession, you know, then you really start getting more focused on cost control.
But at this point, a slight recession or soft landing, maybe no recession. We just think we power right through it because we've got some good momentum going. Also, the first and second quarters of the year are the times to hire lenders because they're all getting their bonuses and they're all free agents at that point in time.
The back half of the year is a little tougher to hire people, because then you've got to, you know, obviously, cover some big out-of-pocket numbers to get people to move. Thank you. I really appreciate that, Connor. Thank you. Sure.
The next question comes from Daniel Cardinus with Chummy. Please go ahead.
Good morning guys.
Thank you.
As we continue to talk about long growth here.
Are there any categories that maybe you're approaching more cautiously now than say versus a year ago?
Well, I would say it goes back even more than a year ago. You know, at the start of the pandemic, obviously, we became very cautious with hospitality and office. The hospitality portfolio has come through in really great shape. We see no issues in the office portfolio either, but that's the one everybody's watching for the next couple of years.
Those would be the two areas that I would mention. We see a lot of really good C&I business, as many of the lenders that we brought on in our legacy markets have started to bring us some nice C&I business. Commercial real estate is still a significant part of who we are, but it is nice to see the C&I business as well. However, outside of the two real estate categories, office and hospitality, I would say the other area.
for 23.
I'll let Dan jump in here as well. Obviously, we're impacted by the lower residential mortgage production than what we had in the past. And then, obviously, we put more on our books. We have benefited to some degree from higher securities revenue.
A lot of that's coming from the CD book, you know, putting fixed-rate annuities out there and getting the commissions off of that. So that's, I think, part of the reason why securities are up so much. And then we're seeing more business activity occurring and even consumer activity, which is driving more service charges on the consumer side.
Dan, any comments you'd make on the income? The only things I would add maybe is that, you know, if you look at trust fees, first quarter trust fees will be a little higher due to the tax preparation fees. That's kind of an annual thing. And you know.
Thinking about SWAP fee income; that's been a pretty big focus here since Jeff's come on board, and he's been very focused on that. So, there's been a lot of training and strategy around how we can better deploy and tap into that a little more. So, I think that's probably going to be the other area that we'll see some lift on.
that we offer swaps being one of them, but also on the trust fees and having securities reps and series seven as well as 6A people and branches, things like that. So there continues to be upside opportunity there. Similar to what we're seeing on the loan growth side in those markets, I think we'll continue to see some better fee growth side because again, these were new products and new businesses that we've introduced into those markets through the banks that we bought.
Offered swaps being one of them, but also on the trustees and having securities reps and Series 7 as well as 6A, people in branches, things like that. So there continues to be upside opportunity there, similar to what we're seeing on the loan growth side in those markets. I think we'll continue to see some better fee growth side because again, these were new products and new businesses that we've introduced into those markets through the banks that we bought. Great, thank you. I'll step back.
This concludes our question and answer session. I would like to turn the conference back over to Todd Kloss and Fran for closing remarks. Thank you.
Great, thank you, and I appreciate everyone's time today. I know a lot of earnings meetings are taking place. I appreciate you joining ours. I look forward to speaking with you in the near future at one of our upcoming events as well. So please stay safe and have a good day. Bye-bye.
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